Chapter 6 Flashcards
(23 cards)
Examination of a firm’s accounting statements and other financial and economic information to assess the economic value of a company’s stock
Fundamental Analysis
Method of estimating the value of a share of stock as the present value of all expected future dividends
Dividend Discount Model (DDM)
A version of the dividend discount model in which dividends grow forever at the same rate, and the growth is strictly less than the discount rate
Constant Perpetual Growth Model
A dividend growth rate based on a geometric average of historical dividends
Geometric Average Dividend Growth Rate
A dividend growth rate based on an arithmetic average of historical dividends
Arithmetic Average Dividend Growth Rate
A dividend growth rate that can be sustained by a company’s earnings
Sustainable Growth Rate
Earnings retained within the firm to finance growth
Retained Earnings
Proportion of earnings paid out as dividends
Payout Ratio
Proportion of earnings retained for reinvestment
Retention Ratio
A dividend discount model that assumes a firm will temporarily grow at a rate different from its long-term growth rate
Two-Stage Dividend Growth Model
Measure of a stock’s risk relative to the stock market average
Beta
A financial performance measure based on the difference between a firm’s actual earnings and required earnings
Economic Value Added (EVA)
A method for valuing stock in a company that does not pay dividends
Residual Income Model (RIM)
An accounting relationship in which earnings minus dividends equals the change in book value per share
Clean Surplus Relationship (CSR)
Current stock price divided by annual earnings per share (EPS)
Price-Earnings (PE) Ratio
Inverse of the PE ratio: earnings per share divided by price per share
Earnings Yield (EP)
A term often used to describe high-PE stocks
Growth Stocks
A term often used to describe low-PE stocks
Value Stocks
Current stock price divided by current cash flow per share
Price-Cash Flow (P/CF) Ratio
In the context of the price-cash flow ratio, usually taken to be net income plus depreciation
Cash Flow
Current stock price divided by annual sales per share
Price-Sales (PS) Ratio
Market value of a company’s common stock divided by its book value of equity
Price-Book (P/B) Ratio
The market value of the firm’s equity plus the market value of the firm’s debt minus cash
Enterprise Value (EV)
